After inflation reaching decades-high levels, global central banks’ main goal was to get real rates out of their highly stimulative, negative territory and back into the positive zone.
The Fed and the ECB can claim some kind of victory – both banks have raised rates sufficiently in relation to inflation such that the peak real SOFR and Euribor rates are positive.
However, the Bank of England, which meets today, cannot make the same claim. Despite expectations at one point rates would peak at over 6%, 5.25% is looking like the crest. But with stickier inflation than in the US and Europe, the peak real Sonia rate in the UK is still negative. That may yet come back to bite the BOE if the UK’s inflation becomes more entrenched as a result (although inflation is likely going to come back to bite all central banks eventually).
The BOE is expected to stay on hold today, and it will be interesting to see the vote split to gauge which way the MPC is leaning. The Fed met on Wednesday and also kept rates on hold as expected. The statement added a reference to financial conditions – aka term premium in this case – which will temper the likelihood of further rate hikes, while longer-term yields remain relatively elevated.
At the peak of rate cycles, and with real rates now (mostly) positive, central-bank focus will further shift to the cumulative impact restrictive policy is having on economies. The mantra remains “higher for longer” (or in the BOE’s case, Table Mountain), but expect that commitment to be dropped in a heartbeat as soon as it’s clear economies are going south.
On that the picture is mixed. In the UK, leading indicators for growth are still positive. In Europe, they are weak, but show nascent signs of turning up.
In the US, a recession now looks less likely than not (< 50%) and a cyclical upswing on the cards. A wrinkle was Wednesday’s manufacturing ISM, but leading data suggest that was a blip. Next month’s survey will be critical.
But the biggest latent global-macro risk for markets is not from the Fed, ECB or BOE, but from the Bank of Japan, which is brewing the mother of all storms with its incessantly ultra-loose policy.
